April 2020 – A state’s fraudulent conveyance statute enables certain disadvantaged creditors to seek to recover a transfer made by an account debtor if that transfer was made either: (a) with the debtor’s actual intent to hinder, delay, or defraud creditors (a/k/a actual fraud); or (b) without the debtor receiving reasonably equivalent value in return at a time the debtor was in financial distress (a/k/a constructive fraud). If the debtor subsequently becomes the subject of a bankruptcy case, then the right to pursue such fraudulent transfer claims for the benefit of creditors (as well as claims to avoid certain obligations incurred by the debtor), shifts to the debtor, to its trustee (if there is one), or in rare instances, to the debtor’s official creditors’ committee or other estate representative. Those claims may be pursued for the benefit of creditors under either section 548 of the Bankruptcy Code, which has a look-back period of two years prior to the bankruptcy petition date, or section 544 of the Bankruptcy Code, which enables a fraudulent transfer action to be pursued based on applicable state law, typically because it has a longer look-back period than the Bankruptcy Code provides.
As New York is a major commercial center, its law often governs fraudulent transfer claims. Thus, it is notable that on December 6, 2019, New York State replaced its version of the Uniform Fraudulent Conveyance Act (“NY-UFCA”) with the substantially different Uniform Voidable Transactions Act (“NY-UVTA”), N.Y. Debtor and Creditor Law §§ 271-281. The NY-UVTA became effective on April 4, 2020 and applies to transactions occurring on or after that date.
The NY-UVTA makes New York’s fraudulent transfer law simpler and more consistent with the federal Bankruptcy Code and the law of most other states. Also, the new statute eliminates the misleading labels of “fraudulent conveyance” and “fraudulent transfer”. The change clarifies that the focus is not on fraud, but on “voidable transactions”, which typically are those in which the debtor did not receive fair value. Significant substantive changes to New York law include the following:
- Shorter Look-Back Periods. Perhaps the most significant change will be reducing the look-back period from six to four years after the challenged transfer occurred. Also, actions to avoid an intentional fraudulent transfer now also may be brought within one year of when the disputed transfer or incurred obligation was or reasonably could have been discovered (if later than the expiration of the four year look-back period) rather than the two year discovery period under prior law.
- Changes to Burden of Proof. Under the NY-UVTA, the burden of proof for all claims and defenses is a preponderance of the evidence. Previously, clear and convincing evidence was required to establish actual fraud. Additionally, the NY-UVTA allocates the burden of proof on each element of the affirmative claim to the plaintiff and most elements of affirmative defenses to the defendant.
- Elimination of “Good Faith” Requirement for Constructive Fraudulent Transfers. Previously, a transfer made or obligation incurred in exchange for reasonably equivalent value could be avoided as being constructively fraudulent if it was made or incurred in bad faith. Under the NY-UVTA, however, the standard is the more objective (and more certain) requirement of receipt of reasonably equivalent value, not “good faith.”
- Simplification of Choice of Law Determination. Under the NY-UVTA, the governing law is the law of the place the debtor/transferor is located when the disputed transfer is made or challenged obligation is incurred. For a business, that location is its sole place of business or, if it has multiple places of business, its chief executive office. This new approach should produce more predictable outcomes than the prior NY-UFCA multi-factor choice of law analysis.
- Elimination of Unique Provisions for Pending Litigation Defendants. Under the prior NY-UFCA, a solvent litigation defendant’s transfer while the litigation is pending is voidable by a successful plaintiff if the transfer was not made for fair consideration. The NY-UVTA eliminates any such special provision for litigation defendants. Instead, they are only subject to the general actual and constructive fraud tests.
- Safe Harbor for Regularly Conducted Foreclosures and Remedies. Unlike current law, the NY-UVTA shields from avoidance regularly conducted real property foreclosures and the exercise of UCC Article 9 remedies against personal property.
- Greater Availability of Attorney’s Fees Awards. The new NY-UVTA enables courts to award attorney’s fees to successful plaintiffs in both constructive and actual fraudulent transfer actions. Prior law only permitted such awards for actual fraud.
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